Thursday, October 30, 2014

The Back of Ed Baptist's Envelope


I have finally had a chance to read some more of Edward Baptist’s The Half Has Never Been Told.

A central claim of the book is that slavery was not just an important institution in American economic growth but that “the returns from the cotton monopoly powered the modernization of the rest of the American economy.” Baptist provides a back of the envelope accounting of the impact of slave produced cotton.

 

Baptist The Half has Never Been Told (page 321-2)

 

“But here’s a back- of- the –envelope accounting of cotton’s role in the US economy in the era of slavery expansion. In 1836, the total amount of economic activity―the value of all the goods and services produced―in the United States was about $1.5 billion. Of this, the value of the cotton crop itself, total pounds multiplied by average price per pound―$77 million―was about 5 percent of that entire gross domestic product. This percentage might seem small, but after subsistence agriculture, cotton sales were the largest single source of value in the American economy. Even this number, however, barely begins to measure the goods and services directly generated by cotton production. The freight of cotton to Liverpool by sea, insurance and interest paid on commercial credit―all would bring the total to more than $100 million (see Table 4.1).

                Next come the second- order effects that comprised the goods and services necessary to produce cotton. There was the purchase of slaves―perhaps $40 million in 1836 alone, a year that made many memories of long marches forced on stolen people. Then there was the purchase of land, the cost of credit for such purchases, the pork and the corn bought at the river landings, the axes that the slaves used to clear land and the cloth they wore, even the luxury goods and other spending by the slaveholding families. All of that probably added up to about $100 million more.

                Third order effects, the hardest to calculate, included the money spent by millworkers and Illinois hog farmers, the wages paid to steamboat workers, and the revenues yielded by investments made with the profits of the merchants, manufacturers, and slave traders who derived some or all of their income either directly or indirectly from the southwestern fields. These third order effects would also include the dollars spent and spent again in communities where cotton related trades made a significant impact another category of these effects is the value of foreign goods imported on credit  sustained the opposite flow of cotton. All these goods and services might have added up to $200 million. Given the short term of most commercial credit in 1836, each dollar “imported” for cotton would be turned over about twice a year: $400 million. All told more than $600 million, or almost half of the economic activity in the United States in 1836, derived directly or indirectly from cotton produced by the million odd slaves― 6 percent of the total US population―who in that year toiled in labor camps on slavery’s frontier.”

 

Where do I begin? The approach is fundamentally flawed. Baptist begins with gross domestic product (GDP), the value of all the final goods and services produced in the country during the year. He refers to this as a measure of the total economic activity. He notes that the value of cotton production equaled about 5 % percent of GDP. No problems so far. But he then adds the cost of the inputs to the production of cotton. Anyone who has taken Principles of Macroeconomics knows that you can’t do this; it is referred to as double counting. If I buy $1000 worth of wood and then make it into a table that I sell for $1,500, we do not add $1,000 and $1,500 because the value of the wood is included in the value of the table, the final good. If he is going to engage in double counting for cotton he would need to engage in double counting for all other goods. He then adds the costs of transportation and insurance; these only count toward US GDP to the extent that they are produced by Americans. He also adds the sales of assets: land and slaves. Again, the sales of assets are not counted in GDP. GDP only counts the value of final goods and services produced during the year. Not all purchases are counted as part of GDP. Only purchases of newly produced goods and services are counted in GDP.  Comparing his calculation of economic activity related to cotton to GDP is meaningless.

 

There is, however, an even deeper problem with this back of the envelope accounting:

perhaps $40 million

probably added up to about $100 million

might have added up to $200 million

 

Baptist is simply pulling numbers out of thin air, or a hat, or wherever it is that he gets them. Back of the envelope calculations tend to involve simplifying assumptions. Baptist seems to understand the term to mean that he can just make things up. The only reference provided is to Table 4.1. Table 4.1 does not provide, as one might assume, information about shipping and insurance. It does not even have any information at all for the year 1836.

Both historians and authors of fiction tell stories, but the stories that historians tell are distinguished from fiction by their grounding in the sources. Historians are constrained to tell stories that they can support with evidence from their sources. Baptist has thrown off this constraint and set himself free to simply make up numbers (or events). This really is a new history of capitalism.

2 comments:

Tim said...

Thank you for these posts. I read the book in a history grad seminar and your posts are helping me understand its many flaws.

Austin Middleton said...

Mike Skousen's "Gross Output" measure (Structure of Production, 1990) includes all business-to-business exchanges, which seems what Baptist is doing here. Skousen's claim is that it's important to look at all exchanges, as this acts complementary to GDP and illuminates what's going on inside it. If GDP were $17T, B2B exchange would be an additional $21T, making overall expenditures $38T.

Now Skousen doesn't think "GO" measures the same thing GDP does; he just thinks it's as important to track revenues and expenses, as well as profit.

Baptist seems to have done something similar here. He's added up all the (estimated) intermediate expenditures related to slavery.

But it's not clear that his estimates have any evidence supporting them, or that he's done the exact same thing to all other expenditures, or that he's changed the denominator when he tries to calculate the % of market activity dedicated to slavery production. So even if Skousen's methodology is accepted, it's not clear Baptist has done it well at all.